It's time to extend statutory management to SCF

CHALKIE

OPINION: Those television journalists crack Chalkie up. "Allan Hubbard, the South Island's richest man," worth around $550 million, they say, mindlessly regurgitating last year's NBR rich list.

Mr Hubbard is not worth $550m and could conceivably end up bankrupt if personal guarantees and the like are greater than his wealth outside of South Canterbury Finance. Before the Timaru Hubbard fan club gets scribbling in protest, Chalkie is not making these comments to denigrate the man; rather it is to examine where SCF sits.

The cornerstone of the former wealth assessment of Mr Hubbard was Southbury Group which was the holding company for SCF, Helicopters (NZ), Scales Corporation and an investment in Dairy Holdings.

A quick capitalisation of SCF's historic profits from 2006-2008 of around about $40m-$50m pretax probably gave the NBR scribes a $300m base for Mr Hubbard's wealth, to which they added roughly $200m for the Helicopters, Scales and Dairy Holding investments.

Ownership of dairy farms added extra and the imponderable negative was debt which could only ever be guessed at.

Chalkie reckons that Southbury is now worthless and given that SCF has a $114m loan to the parent, this is not trivial. In an iterative process, the less SCF is worth, the less assets Southbury has to back the loan, the more the loan has to be written down, the less SCF is worth and so on.

What does the Southbury balance sheet look like? It is a private company but by tracking through SCF announcements one can come to some powerful conclusions.

The Dairy Holdings stake, Helicopters, and Scales have been unceremoniously shoved into SCF to shore up that balance sheet so it's an obvious hypothesis that SCF is Southbury's only major asset.

The April debenture prospectus, raising money for day- to-day liquidity to repay debentures that are maturing, has more information. When Helicopters and Scales were injected into SCF a $16m loan was advanced to Southbury.

"The amount advanced to Southbury Corporation was applied, in full, towards repayment of third-party debt of Southbury Corporation, a necessary prerequisite for the restructuring and sale of Helicopters (NZ), and Scales Corporation shareholdings to the company."

This suggests that Southbury does not have any other debt apart from SCF, or has no other substantial assets which are not already pledged as security against other debt.

The prospectus also outlines that when SCF had to repay early a US private placement debt facility, a $21m break fee was paid by Southbury. What a surprise, the money to pay this fee was advanced to Southbury by SCF.

Southbury hasn't got any cash or other assets to settle debts - SCF is its handy "yes" banker.

The prospectus showed Southbury owed SCF $77m. Adding $37m from the above two transactions brings the balance to $114m, and more as interest accrues.

The only assets outside of SCF that Southbury has publicly talked about are $99m of advances bought off SCF in 2008.

SCF has now said that these assets were impaired by $90m and are therefore now worth $9m.

A Companies Office search shows Southbury has shares in a number of other companies but the ones Chalkie recognises are more or less worthless, suggesting Southbury has become the trashcan of Hubbard's interests as he tried valiantly to remove the rubbish from SCF.

The balance sheet is pretty simple; on the liabilities side there is $114m of loans to SCF; on the asset side 100 per cent of the ordinary shares of SCF and perhaps $20m of assorted flotsam and jetsam. The big question is obviously what is SCF worth?

Following the injection of $153m of assets (Helicopters and Scales) post the December balance sheet SCF has net equity of $197m.

The first problem is that included in assets is $83m of tax loss assets plus $28m of prepaid tax.

Both of these figures need the group to be earning substantial profits for them to be actually worth these amounts.

With the finance company sinking under bad debts, it will need the Helicopters and Scales' Apple orchards to perform like crazy for the group to make substantial profits. Unfortunately, SCF needs to monetarise these two operating businesses to stay alive.

Chalkie will assume that prepaid taxes are good and simply take off the $83m of tax losses to estimate the equity value of SCF: $197m - $83m = $114m.

The next problem from a Southbury point of view, is that SCF has $120m of preference shares on issue which sit in front of ordinary shareholders as a prior "claim".

If Chalkie's sums are correct, these preference shareholders therefore "own" the entire estimate of SCF's net worth.

So, assuming nothing much has changed since the December balance date, Southbury's investment in SCF is probably worthless.

Like a teenager pushing boundaries, SCF's biggest problem is its parent.

And any deficit position in the loan from SCF to Southbury, results in the loan acting like a return of capital, effectively meaning close to the entire $114m should be written off.

The proof of this assertion is best seen by asking why doesn't SCF simply lend Southbury $300m which is then injected back into the finance company as equity, solving all balance sheet problems?

Clearly, such a transaction would create no real strength, yet it is merely an exaggerated example of what has already taken place. All the incessant book entries and paper shuffling between Hubbard entities has left SCF with a suspect balance sheet. Presuming Mr Hubbard fails to find an equity rescuer, surely it is time for the Government to end this farce and extend the current statutory management of the Hubbard empire to the finance company.

If Southbury and the tax losses are worthless as postulated, the Government is effectively the equity owner. The current situation of SCF offering 8 per cent government guaranteed debentures is completely queering the depositor market and is a stupid way for the Government to raise money.

It would be best if the Government took control and funded SCF at its own 4 per cent cost of funds. This would allow for the company to build up some positive cash flow, possibly even utilise tax losses and take its time in selling whatever businesses need to be sold and fund its customers in an orderly manner.

This part of the statutory management process would actually be in Mr Hubbard's interest and partly return the favour he did the Government when he tipped Helicopters and Scales - his last remaining large assets - into SCF.

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